Property, Plant & Equipment

(PPE): Definitions

PPE are (per IAS-16) IAS 16 –Additional

-tangible items that are Definitions
-held for use in the production or supply of goods or services, -Depreciation
for rental to others, or for administrative purposes; and -Depreciable amount
-are expected to be used during more than one period -Cost
where an asset is (per the framework): -Fair Value
-a resource -residual value
-controlled by an entity, -useful life
-as a result of past events, and -carrying amount
-from which future economic benefits are expected to flow to
the entity

Recognition criteria
-probable that future economic benefits will flow to the entity
-cost may be reliable measured

Initial Measurement

Initial costs Subsequent Costs

Cash Fair Value Capitalise only if:

-All costs necessarily
incurred in bringing
the asset to a
location and putting
it into a condition
enabling it to be used
as intended by
management
Asset swaps: - -the recognition criteria are met
FV of asset given up, unless (if not met, cost must be
FV of asset received is more expensed)
clearly evident (or if it’s the
only FV available) Replacement of parts and repeat
-If no FV available, use major inspections: -
carrying amount of asset derecognise old carrying amount
given up -capitalise new cost (generally as
a separate part)

Subsequent Measurement

In general Changes in accounting estimate

-The depreciable amount must be occur if any of the following are changed:
depreciated on a systematic basis over -the estimated useful life
the estimated useful life of the asset -the method of depreciation
-The method used should reflect the -the residual value
pattern in which economic benefits are -the estimated cost of dismantling,
expected to be generated from the asset removing or restoring items of PPE
–The depreciation charge is expensed
unless it is capitalised to another asset See IAS-8 for more details
 Measurement Models

Cost Model Revaluation model:

Calculation of the carrying amount: Calculation of the carrying amount:
-cost -fair value on date of revaluation
-less accumulated depreciation -less subsequent accumulated depreciation
-less accumulated impairment losses -less subsequent accumulated impairment losses

The rule: an asset may be written down
below HCA, but may never be revalued
above its HCA
Increase in value: previous impairment
reversed debit: asset; credit: reversal of
impairment loss (Income)
-limited to the carrying amount that it
would have had had there never been an
impairment loss (i.e. its historical
carrying amount)
Decrease in value: impairment
debit: Impairment loss (Expense); credit:
asset
The rule: the asset may be valued at its fair value (if
greater/ less than its HCA)
Increase in value: debit: asset (FV-ACA); credit:
income (to extent reverses previous decrease: HCA-
ACA); credit: revaluation surplus (FV-HCA)
Decrease in value: debit: RS (to the extent reverses
previous increases: ACA-HCA); debit: expense (HCA-
FV) credit: asset (FV-ACA)
The revaluation surplus: -
transferred annually to retained earnings (amount
transferred equals after tax effect on profits as a
result of increased depreciation) OR
-transferred to RE when asset is fully depreciated
OR
-transferred to RE when asset is disposed-off.

Disclosures

General Disclosures: SOFP related disclosures: Income statement related

Disclosures needed -Reconciliation between opening & closing disclosures:
for: balances -Depreciation
-break-down of these balances into gross -Profit or loss on disposals
-Depreciation methods
carrying amount and accumulated –Increase or decrease in
-Rates (or useful lives) depreciation & Impairment losses RS
-Cost or revaluation -Tax effect of creation or
method If revaluation model, also increase in RS
-carrying amount using cost model -Transfer from RS to RE
-basis used for revaluation -Any restriction on
- valuer independent distributions to
-Reversal of Revaluation Surplus (RS) shareholders
-Impairment loss expensed
- Increase in/creation of RS
- Reversal of impairment loss

If cost model used, also

-the FV
 Inventory Valuation:
Lower of Cost or NRV

Cost Net realizable value:

Calculation technique Calculation:
-Actual -Estimated selling price
-Standard; or Less: estimated costs to complete
-Retail method Less: estimated selling costs

Includes
-the general rule: costs that are incurred
in order to bring the asset to its present
location and condition
-examples include: raw materials; labour;
variable manufacturing overheads; fixed
manufacturing overheads; transport
costs inwards; non-refundable taxes
Excludes
-abnormal wastage; storage costs (unless
necessary to the production process);
administrative expenses that do not
contribute to the general rule; selling
costs; transport costs outwards;
recoverable transaction taxed

Measurement of Inventory Movements

If goods are similar: use either If goods are not similar: use
-Weighted Average (WA) method -Specific Identification (SI) method
-First-in-first-out (FIFO) method

Disclosures

General Disclosures: SOFP related disclosures: Income statement related

Disclosures needed for:
-Accounting policies
applied
-Inventory remaining on
statement of financial
position
-Inventory costs
recognized in profit or loss
-Carrying amount in each
category of inventory
(materials, WIP, finished
goods, production
supplies, merchandise)
and in total
-Carrying amount of any
inventory measured at fair
value less costs to sell
-Carrying amount of
inventory pledged as
collateral for liabilities
disclosures:
-Amount of inventory
recognized as an expense
(usually cost of sales/cost
of goods sold)
-Amount of write-downs
to NRV or other losses
-Amount of any write-
down reversals
-Circumstances that
resulted in reversals
 Property

Owner-occupied (Follow IAS-16) Investment Property (Follow IAS-40)

-Land/ building/ both -Land/ building/ both
-Held by owner or lessee under a finance -Held by owner or lessee under a finance
lease lease
-For use in supply of goods/ services or -To earn rentals or for capital
for admin purposes appreciation

Recognition Measurement
-Same as for PPE (IAS-16) -Initial measurement: cost
R -Definition & recognition criteria -Subsequent measurement: choose between 2 models
e must be met
-Subsequent expenditure: normal capitalization rules
c (IAS-16)
Initial Measurement -Transfer in/ out (5 possibilities)
o -Disposals/ purchases (IAS-16)
-Cost
g -Including transaction costs -Impairments (IAS 36)
n
i Subsequent Measurement
t -Cost model or fair value model
-You can choose any model; except IAS40.34: properties held under operating lease and
i classified as investment property must use fair value model (i.e. no choice)
o -All property to be measured using the same model
n
Cost model Fair Value model
-IFRS 5: if available for sale; or -Changes in FV to be recognized in P/L
-IAS 16: for all other assets -If FV becomes no longer available, then last
& known FV remains the CA until a new FV is
available

M Change in Use Situation Accounting

e From investment property (FVM)
to owner-occupied property or to
a inventory
s From owner-occupied property in
IAS 16 to investment property
u (FVM) in IAS 40
r according to the revaluation in IAS
e
From inventory in IAS-2 to
m investment property (FVM) in IAS
40
e
In progress investment property
n (CM) in IAS 40 to investment
t property (FVM) in IAS 40
Owner occupies the Deemed cost in IAS 16 or IAS 2 is FV
property or begins to at the date of change in use
develop it for sale
End of owner-occupation Depreciation to the date of change;
the difference between carrying
amount & FV is accounted for
16
Owner enters into an Difference between IAS 2 carrying
operating lease with a amount and IAS 40 FV is recognized
third party in P/L
Owner finish construction Difference between carrying
or development amount & FV is recognized in P/L
 Impairment of Assets

There should be an annual ‘test of impairment’ with the purpose of identifying possible
impairments. Calculate the: carrying amount (CA) and recoverable amount (RA)
If the CA>RA = Impairment

Carrying amount Recoverable amount Impairment loss

per statement of
financial position:
-cost or fair value
-less ‘accumulated
depreciation and
impairment losses’
Greater of: ACA-RA:
-value in use or -ACA>HCA: Debit RS
-fair value less costs to sell -HCA>RA: debit IL
Calculated if:
-test of impairment suggests impairment
-intangible asset that:
- has indefinite useful life
-is not available for use
-is goodwill

Fair value less costs to sell Value in use

Amount obtainable in an arm’s length The present value of estimated future cash
transaction between knowledgeable, willing flows from:
parties -use and
Less -disposal at end of useful life
Disposal costs Exclude the following cash flows:
-Financing
-Tax
-Outflows in respect of obligations already
recognized as liabilities

Estimated future cash flows Appropriate discount rate

Use cash flows based on managements’ best -Pre-tax
estimated projections: -Market related risk free rate
- Short-term projections (less than 5 yrs): -Adjusted for risks specific to the asset
approved budgets only
-Long-term projections (beyond 5 years):
extrapolate the approved budget using a
justifiable growth rate (generally a stable/
declining growth rate)
 Test of Impairment
External information
-Significant decrease in market value
-Significant adverse current/ future changes
in the market in which the asset is used
-Increase in market interest rates (decreases
value in use)
-Carrying amount of business net assets >
market capitalization etc.
Recognition
Impairment loss
If cost model is used:
debit: impairment loss (expense)
credit: accumulated depreciation and
impairment losses
Or
If revaluation model is used:
where there is a revaluation surplus debit:
revaluation surplus (to the extent of the
balance therein) and credit: cost
If the drop in value exceeds the revaluation
surplus balance: debit: impairment loss
(expense) (with any excess)
credit: accumulated depreciation and
impairment losses
Depreciation thereafter: a new
depreciable amount is calculated (after
deducting the accumulated impairment
loss) which should be depreciated over
the remaining useful life of the asset.
Internal information
-Obsolescence
-Physical damage
- Adverse current/ future changes in usage of the
asset
-Actual profits and/ or cash flows worse than
budgeted
-Net cash outflows or losses becomes apparent
when looking at figures in aggregate (e.g. past +
current; current + future; past + current + future)
Reversal of impairment loss
If cost model is used:
debit: accumulated depreciation and impairment
losses
credit: impairment loss (income)
Or
If revaluation model is used:
up to HCA:
debit: accumulated depreciation & impairment
losses and
credit: reversal of impairment loss (income)
for any amounts above HCA:
debit: cost and
credit: revaluation surplus
Depreciation thereafter: a new depreciable
amount is calculated (after deducting the
remaining accumulated impairment loss)
which should be depreciated over the
remaining useful life of the asset.
 Inventory Valuation:
Lower of Cost or NRV

Cost Net realizable value:

Calculation technique Calculation:
-Actual -Estimated selling price
-Standard; or Less: estimated costs to complete
-Retail method Less: estimated selling costs

Includes
-the general rule: costs that are incurred
in order to bring the asset to its present
location and condition
-examples include: raw materials; labour;
variable manufacturing overheads; fixed
manufacturing overheads; transport
costs inwards; non-refundable taxes
Excludes
-abnormal wastage; storage costs (unless
necessary to the production process);
administrative expenses that do not
contribute to the general rule; selling
costs; transport costs outwards;
recoverable transaction taxed

Measurement of Inventory Movements

If goods are similar: use either If goods are not similar: use
-Weighted Average (WA) method -Specific Identification (SI) method
-First-in-first-out (FIFO) method

Disclosures

General Disclosures: Balance sheet related Income statement related

Disclosures needed for:
-Accounting policies
applied
-Inventory remaining on
statement of financial
position
-Inventory costs
recognized in profit or loss
disclosures:
-Carrying amount in each
category of inventory
(materials, WIP, finished
goods, production
supplies, merchandise)
and in total
-Carrying amount of any
inventory measured at fair
value less costs to sell
-Carrying amount of
inventory pledged as
collateral for liabilities
disclosures:
-Amount of inventory
recognized as an expense
(usually cost of sales/cost
of goods sold)
-Amount of write-downs
to NRV or other losses
-Amount of any write-
down reversals
-Circumstances that
resulted in reversals